Line 234 is the line on our tax returns that reports our net income. Ideally, retirees want the highest gross income and the lowest net income. Why is this so important? Mainly to help reduce taxes owed and reduce the chances of OAS claw-backs. By carefully constructing the sources of retirement income, retirees maintain their after-tax income, pay the least amount in taxes and receive the most in government benefits. Here are some quick rules of thumb that will help lower the value on Line 234. The best to worst sources of investment income are capital gains, followed by interest income, followed by dividends (because the grossed up dividend is included in income and then receives the dividend tax credit after Line 234.
Three sources of income that help lower Line 234 are:
Prescribed annuities because the annuity payment is primarily a return of principal so very little taxable income is reported.
Distributions from SSQ’s funds are all return of capital until the deposit amount is paid out, therefore tax-free for many years.
Non-registered GMWBs work well too because a large component of each payment is tax-free because it is a return of capital and the balance of the payment is a capital gain.
These are just a few ideas to help lower a client’s net income without impacting their after tax income. I look forward to all your comments. Take care, Scott Edgington Director of Wealth Qualified Financial Services Scott.firstname.lastname@example.org 416.786.4140